Now that the politicos are falling all over each other offering nostrums to solve the housing crisis, I’d like to get my two cents in.

You would be forgiven for thinking that the sub-prime crisis was a clever scheme inflicted upon innocent buyers . That’s the standard narrative going down now.

So…in the issue of fairness…let’s just make sure that any rescue package would exclude the undeserving. Which would be…

1 & 2: Liars Loans

1. Liar’s loans: part I. I use G-Mail as my primary e-mail, and I glanced at the top of the page ad just a day ago. It was an ad promoting a company that could reproduce 100% authentic pay stubs and other proof of employment forms.To see this staring me in the face a year after the sub-prime scandal broke tells me that this behavior is deeply embedded and continues unabated.
2. Liar’s loans: part II. This refers to the speculators who lied when they said the home being purchased and financed was to be their primary residence. Lenders know that owner occupied homes have a lower default rate than investor owned homes, and checking the wrong box is not a casual error. It was an attempt to deliberately conceal the buyer’s intentions and was a fraudulent act.

3: Inflated appraisal homes

You may be familiar with the initials MAI, which are used to denote appraiser membership in their professional society. Member of the Appraisal Institute. That was back in the day.

Sadly, as the mortgage machine demanded inflated appraisals to match bubble housing pricing, these initials now stood for “made as instructed”.

The dialog between the nominal lender or mortgage broker and the appraiser would go something like this:

“We’d like your totally independent and professional appraisal of this $500,000 home. Please tell us what the real market value of this $500,000 home is. Once we get this fine $500,000 home appraised, we can go to closing. And then we’ll all get paid”.

Wink wink. Nod nod.

The appraiser would then integrate cost, replacement and market data in their immaculate, well documented twenty page report and come up with $505,000. Maybe $505,995.

4. No money down loans

How do you go about rescuing an owner who has, in effect, been leasing with a free call option to buy? These loans were predicated on a constantly rising market so that the putative owner could either sell out or re-finance out, thereby manufacturing an “equity” out of thin air.

Now, once you eliminate the over appraised, over financed, and fraudulent borrowers, you are left with…

People Like You and Me?

Those dull and unimaginative buyers who did not lie on their application, and who prudently took out 15 or 30 year fixed, fully amortizing loans… ethical appraisers who did not fudge the numbers… and lenders who demanded traditional down payments of 20-25%, to borrowers who had actual job income.

Your traditional Ozzie and Harriet buyers, from a time almost lost in the mist.

The only problem with our victimization narrative now, is that by and large, these are the buyers who are current on their loan. Sure enough, their $500,000 house may now only be worth $400,000, wiping out ( in the current market) their 20% cash down payment.

But they don’t need to panic yet.

• They still have a nice home to live in, and the real estate market will recover once the excess has been wrung out of the market.

• They bought the house for the comfort of their family and a reasonable commute to their job. That part of the equation is unchanged.

• They will never face a margin call on the home, provided they make the monthly payment. Compare their serenity with the poor schmuck holding an illiquid tranche of mortgage securities, including , maybe, even our Ozzie and Harriet home loan.

• They can easily be margined out and cratered by the collapsing value of the paper they hold. But not our stalwart homeowner.

So, what we are left with is a fair and equitable rescue package that will not rescue the liars, frauds, and zero or negative equity borrowers,… just the good guys who paid traditional down payments..

Uh…hold on. If the good guys are staying current, than who is left to rescue?

Mostly, the lenders. The same idiots who got us in this mess in the first place, by abrogating all common sense and standards.

Probably the rescue that would help them the most is a bipartisan bill that would restore all residential equity to the bubble market high water mark.

That should do it.

And while they are at it, maybe an amendment to turn back the tides.

The King Canute omnibus recovery, reconciliation, and stimulation act.

This is an election year, so you had best stop laughing now.

Posted: 03|25|08 at 6:03 am. Filed under: real estate.
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